The issuance of Uruguay's first real estate investment trust (Reit) is being quickly followed by more advanced deals. Strong relationships with pension funds and the securities regulator should be top priorities for managers looking to tap the market.
A rush of high net-worth individuals entering the country and a shortage of eligible investments for pension funds makes Uruguay ripe for public Reits. And despite no Reit
legislation, asset manager Indendendencia launched the first initial
public offering (IPO) in May and another, managed by Compass, is in its
preliminary stages (yet to be filed for registration).
Counsel on both deals offer two warnings: work prospective investors'
requests into the structure before filing with the regulator; and then
be willing to wait.
Tailor-made
The suitability of Reits for pension funds, Uruguay's dominant
institutional investors, has driven the development of the new
instrument.
Guyer & Regules partner Nicolás Piaggio who is working on the
Compass deal said there were not many products that are eligible for
investment. "Therefore the pension funds are eager to discuss and
cooperate with whoever brings new products to the market – they want
them to be eligible investments," he said.
Indepencia's Reit allowed pension funds to participate for the first
time in the real estate market. The long-term nature of the investment
makes it attractive, but it also involves exposure to the asset at the
centre of the financial crisis.
Ferrere partner Diego Rodríguez, lead counsel on the deal, said this
meant the first-time real estate investors requested additional
protections. "It was complex to negotiate with them and come up with a
final structure with which they were comfortable," he said.
Compared to the US and other more established Reit markets, pension
funds will be more cautious. "Here, when pension funds invest in
something they take a lot more precautions, controls and formalities that are not all that common in other countries," Rodríguez added.
But in Uruguay, they also get a greater opportunity to do this. "As part of launching the
product the developer discusses openly with the prospective investors –
mainly pension funds – and then the product is tailor-made to the
requests and needs of prospective investors," Piaggio said.
Mangers must be prepared to engage with the funds throughout the
structuring process, and give serious consideration to their requests.
Managers, however, will also receive two key benefits from this: great
certainty about investor appetite when it launches, and an appeased Superintendencia de Servicios Financieros.
"The regulator sees this as a good opportunity for the promoters to make the product better," Piaggio said.
Mixed feelings
According to Independencia's Claudio Zichy, who led the deal internally, the manager being known by the Superintendencia, and known for having a good track record with the country's investors, will be crucial for the approval of future Reits.
He agreed that future deals will be easier now that there is a
precedent to work from, but only slightly. "It takes some time for
[approval] to happen and you need to know the right people to make it happen. If you go there and try to do it on your own, it would be more difficult," he said.
It could take a couple of years between the start of structuring to
the launch, Zichy said. Work on the Inderpendencia deal started in 2007
and it listed on May 15 2012. As to be expected, the deal stopped during
crisis, but it still took around three years of regular work before it
launched.
Piaggio has mixed feelings about how receptive the regulator has been in considering the new instruments. The authority can be welcoming at the initial stages, but then approval can be delayed.
"It's probably because they are swamped with work, but either way, it
takes too long to overcome the obstacles for these products to be
released into the market," he said.
An alternative to Argentina
What makes Inderpendencia's Reit most impressive is it was structured under the country's 2003 trust law. Uruguay has no specific Reit law, meaning no tax efficient legislation.
In other countries, tax benefits embedded in legislation are a major
reason for using the vehicle. But in Uruguay, connecting pension funds
with the real estate market is the main driver.
Zichy said tax treatment under the Inderpendencia Reit was optimisied by incorporating debt and equity features. The asset management firm's experience in Argentina, which also has no tax efficient legislation, helped here.
"We have done something similar in Argentina, we used what we learned
there and applied it in Uruguay as they use very similar structures,"
he added.
Argentina's Reit market is more developed than its eastern neighbour.
The similar regimes, and Uruguay's economic growth, could create an
alternative for investors who are staying away from Argentina's real
estate market because of the country's political situation.
Accelerating structures
Even before the second Reit comes to market, it seems the
instrument's development is accelerating. Independencia's Reit, which
raised $60 million on its IPO, is limited to investing in existing
properties, creating sale-and-lease-back opportunities for property
owners wanting to free up their balance sheet.
"As this was the first deal they didn't want to get involved in construction," Rodríguez said.
The Compass Reit, which is still at a preliminary stage after work
commenced late last year, is expected to raise up to $90 million. This
vehicle will be able to invest in the development of real estate. This
makes is more complex to structure as it involves buying and developing
land, however it also appears to be where Reit opportunities will be in
Uruguay.
The economy is growing quickly and the real estate industry has
performed well, but in the high-end residential and tourism sectors more
than commercial buildings.